Azul S A Sp/Adr

Hello everyone and welcome to Azure's first quarter earning call. My name is Zach and I will be your operator for today. This event is being recorded and all participants will be in a listen-only mode until we conduct the Q&A session following the company's presentation. If you have a question, click on the Q&A icon at the bottom of your screen and write your name and company. When your name is announced, please turn your microphone on and proceed. For those who are listening to the conference on the phone, press star nine to join the queue and star six to accept the audio when requested. I would like to turn the presentation over to Thais Heberle, Head of Investor Relations. Please proceed, Thais.

Thank you, Zach, and welcome all to ASUS First Quarter Earnings Call. The results that we announced this morning, the audio of this call, and the slides that we referenced are available on our IR website. Presented today will be John Rogerson, CEO. Alex Moffittoni, our CFO, and Avi Sham, Chief Revenue Officer and President of Azul, are also here for the Q&A session. Before I turn the call over to John, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance, constitute forward-looking statements. These statements are based on a range of assumptions that a company believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC files. Also, during the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. With that, I will turn the call over to John.

Thank you, Thais. Welcome, everyone, and thank you for joining us today. First, let me begin by thanking our incredible crew members for their passion and dedication. The first quarter for Azul brought a return to operational excellence that our customers expect. As we shared many times before, in 2024, we did not run the best operation due to significant OEM issues we experienced. This was tough on our customers, our crew members, and had an impact on our results. I'm happy to report now that towards the end of the first quarter, our operation is back. I will give you more details later on this call But for now, I just want to thank our crew members for their perseverance and hard work. Turning to slide three, I want to just highlight the sustainable competitive advantages of the Azul business model. The combination of a differentiated network with unique fleet flexibility, our high growth business units, our lowest unit cost in the region, together with passionate crew members and supportive stakeholders is what allowed us to deliver the results we present to you today. On slide four, I want to start with our network. one which we are constantly optimizing with a singular focus on profitability and the best use of our assets, our aircraft. This network that is different by design with no nonstop competition in 82% of our routes, representing 77% of our revenue, a remarkable competitive advantage. Still, we're constantly making changes to make it even better. This quarter was particularly active. In the month of March, we suspended service to 14 cities. This was in response to the high fuel environment combined with the revenue performance in these markets. At the same time, we increased service in many other markets, up gauging to fuel efficient Embraer E2 aircraft, especially at our Belo Horizonte hub. These are just some examples of how we continuously strive to extract the best possible results from our network. On slide five, you can see that we're excited to report another strong first quarter. Revenue of 5.4 billion reais with a RASC of 42 cents. Flat year over year with a 16% increase in capacity. Our EBITDA for the quarter was 1.4 billion reais with a margin of 26%. An EBIT of 571 million reais. In the first quarter, we were impacted significantly higher than expected because the devaluation of local currency and irregular operations, which I will address later on this call. Turning to slide six, I want to share the details on our revenue performance. Overall, we maintain unit revenue flat with a 16% growth in capacity, a strong result overall. Even more impressive given the fact that the major part of our year-over-year increase in capacity was in our international network due to the low base from last year. Normally, this would have an effect on lower unit revenues due to the longer stage lengths, but thanks to the demand environment and the contribution from our ancillary and business units, we were able to overcome that effect. We are also actively using technologies in the area of revenue management. Tools make recommendations on pricing, yield management, and ancillary revenue on a quasi real-time basis, further allowing us to maximize our unit revenue. Turning to our business units, I want to highlight their revenue contribution and impressive performance this quarter. Our business units have done a great job of growing beyond the metal, finding new and unique ways to increase our revenue. outside of just ticket revenue. On slide seven, you can see the contribution of our high margin business units on RASC, which grew from 19% in first quarter 24 to a very strong 23% in first quarter 25. All units combined resulted in positive impact of more than 480 million reais in the quarter, accounting for 35% of our total EBITDA in the quarter. On slide eight, you can see the continued high growth from each of our beyond the middle business units. Our loyalty program now boasts 19 million members and a record high monthly active users. Sloan revenue was up 65% year over year and net unit revenue contribution was double compared to first quarter of 24. The combination of our domestic and international network, airline, hotel, retail, and banking partners has resulted in record engagement and results in our loyalty program. Our vacations business continues to grow with gross billings up 56% year-over-year. Upcoming network additions such as Porto, Mendoza, Berlacci, and Madrid will continue to propel growth in this leisure-focused business for years to come. Finally, Azul Cargo, our logistics business, had a very strong quarter, total revenue up 20% year-over-year, international revenue up 62%, and most importantly, our EBITDA doubled compared to first quarter 2024. During the quarter, we entered into service our two A321 freighters, and they are becoming a key driver of revenue and margin expansion in the business. As we have always said, our business units are a key part of our strategy and a driver of unit revenue and earnings expansion going forward. On slide nine, I want to highlight the improvements we have made in our ancillary revenue. Overall ancillary revenue was up a very strong 22% year over year. and ancillary revenue per pax was up 14%. These increases were driven by the growth in our premium products, such as business class and extra legroom seats, together with the record activity in our loyalty program. We continue to see opportunities in improving merchandising, CRM, and pricing, so we expect continued growth in the ancillary revenue per passenger metric. On slide 10, I want to highlight another key competitive advantage, our co-branded credit card with Itaewoo. We believe we have the strongest co-branded program in the country, with the highest percentage of premium card holders. We already had the Visa Infinity card that was incredibly popular with spending of about one half of 1% of Brazil's GDP. And this April, we're proud to launch the MasterCard Black Skyline premium credit card. This product further positions Azul as a premium airline in Brazil and expanding even further our base of high yield demand and revenue. On slide 11, I want to turn to the cost side of the business. We continue to be the lowest cost provider in Brazil. This includes the effects I mentioned on the cost we're facing from operational impacts and OEM challenges. As I mentioned in the opening, and will show on the next few slides, we're significantly improving our operation, and those inefficiencies are coming out of our business. We also continue to be laser focused on efficiency, whether that is in our aircraft utilization or our headcount productivity. Round time at airports. We are focused, focusing Azul into a lean operating airline. We have made significant progress so far, but there's still more we can do. Turning to slide 12, you will see two great examples of operational improvements that led to efficiency. Despite all OEM challenges faced in the latter part of 2024 and early 2025, we were able to increase our aircraft utilization by almost 5%. This is a result of a combination of factors, including our network optimization strategy I mentioned before, more new generation fuel-efficient aircraft flying in our network, and a significant improvement in our operational reliability. In addition to a higher utilization leading to more efficient ASK generation, the airline is also more efficient, delivering additional ASKs with less headcount. Our efforts to optimize processes, develop new automation technologies alongside our passionate crew members resulted in a productivity being up 18.9% year over year. On slide 13, you will see the impact on ASK generation from all of the challenges we faced in 2024. I would like to highlight two major factors. We began the year with the unfortunate floods in southern Brazil, a devastating natural phenomenon that turned 10% of our network offline overnight in one of the most profitable bases. Shortly after, the constant OEM challenges we faced throughout the year worsened with several unscheduled engine removals and longer recovery time. impacting our ASKs for the second half of 2024. These impacts were a loss of close-in ASKs, which had a devastating impact to our customers and operation overall. However, since early 2025, working together with the OEMs and our partners, we're seeing improvements in all operational areas. We've been able to close the gap and get back on track to our planned capacity generation. On slide 14, I would like to highlight two examples of impacts disruptions trigger to our operations and customers that we've been able to significantly improve over the past few months. Our irregular operations as a percentage of departures has decreased by over 65% in the first quarter and continues to be a downward trend, such as directly to another great indicator, which is the average night's customer spend in hotels due to the impact to their booked flights. During the past quarter, we reduced our average customer hotel nights by 75%. Even though we made significant improvements during the first quarter, we were still impacted by the additional cost generated by the irregular operations and the customer litigation caused by it. Looking forward, we see a positive trend and expect these costs to improve during 2025. Going forward on slide 15, you can see the improvements in the macro scenario to support our EBITDA generation in 2025 and beyond. The Rial has appreciated 9.3% in 2025, which reduces our dollar-denominated debt and expenses and improves our cash flow generation and reduces the cash outflow to pay down aircraft lease, CapEx, and interest. We're also seeing improvement in the heating oil curve, which is down more than 17% compared to the January peak. Using the current spot price, fuel expenses would have been $200 million lower in the first quarter, showing the potential upside to improve EBITDA and cash flow generation in the coming quarters. Turning to our final slide, I must highlight how the first quarter really shows how much Azul has overcome a challenging year and is already generating positive results. Our unique business model has once again proved the value generation this airline has at its core. Our enhanced approach to our network strategy are beyond the Beyond the metal, business units and improved operation have resulted in improved, more efficient ASK generation at the lowest cask in the country while sustaining a strong unit revenue. I'm certain that our competitive advantages will continue to prove how Azul is the strongest airline in the region and yield positive results on a consistent basis. I can't thank enough our entire crew member base for bringing back to our usual levels of operational excellence. I'm proud of the unique business model we have built together.